Are Bond Markets and Bank Credits Complementary or Substitutable? Evidence from the Rule of Law and Legal Origin

Corporate bond issuances and bank lending coexist despite being financed by the same debt. This study investigated whether strengthening rule of law influences bond issuance and bank lending preferences, using two regression models and data for 50 countries, and found that strengthening the rule of law positively impacts bond issuance and bank lending size. Measuring the marginal effects of the rule of law and debt financing for each legal origin showed that a stronger rule of law was positively related to the size of bond issuance in French legal origins and negatively related to the other legal origins. When a bond issuance index divided by the size of bank loans was created and estimated as the explained variable, a strong negative association of a stronger rule of law was observed for legal origins with a common law background. The effect of the rule of law varies with the institutional environment